Preferred sell-off continues; financials take a beating; Apollo paper frees; Zions active

By Stephanie N. Rotondo

Phoenix, June 11 - Inflation concerns were resulting in a "continued sell-off" in the secondary preferred stock market on Tuesday, according to a trader.

"People are lightening up on lower coupon issues," particularly in financials, the trader said.

Another market source didn't think it was inflationary issues that were causing the heavy market - the Wells Fargo preferred stock index was down 123 basis points, he said - but he also wasn't sold on the idea that a drop in commodities or the Bank of Japan's holding to its monetary policy were to blame either.

"I find that hard to believe," he said, though he conceded that those issues could have played their part. For him, however, he opined that concerns about what the Federal Reserve planned to do with its bond repurchases and a decline in Treasury yields were to blame.

"There was a lot of weakness in the short end of the curve," he noted.

Among financials, Ally Financial Inc.'s 8.125% series 2 fixed-to-floating rate trust preferreds (NYSE: ALLYPA) dropped 30 cents to $25.75, while J.P. Morgan Chase & Co.'s 5.5% series O noncumulative preferreds (NYSE: JPMPD) fell 63 cents to $23.58.

A source said JPMorgan's larger-than-the-trend loss was likely tied to its holding company's outlook being cut by Standard & Poor's.

Also, PNC Financial Services Group Inc.'s 6.125% fixed-to-floating rate noncumulative preferreds (NYSE: PNCPP) declined by 29 cents to $25.25 and Countrywide Financial Corp.'s 7% capital securities (NYSE: CFCPB) lost 16 cents, closing at par.

In the primary, Apollo Investment Corp.'s newly priced $135 million of 6.875% $25-par senior notes due 2043 were pegged at $24.58 bid, $24.72 offered at midday.

A trader said he believed the issue - which priced Monday - had freed to trade.

After the bell, a market source confirmed that the issue had freed up, seeing the paper closing at $24.60.

The volume weighted average price was $24.63.

Zions active, softer

Zions Bancorporation's 9.5% series C noncumulative perpetual preferreds (NYSE: ZBPC) were trading actively but slightly weaker at midday. The preferreds were off a penny at $25.36 around noon.

The preferreds closed at $25.35, off 2 cents.

The action in Zions was more than likely tied to a new $300 million bond issue the company priced, the proceeds of which could be used for a redemption. The series C preferreds could therefore soon be called.

The securities become redeemable on Sept. 15.

Zions is a Salt Lake City-based bank holding company.

Lawsuit helps Fannie, Freddie

A market source said that some of Fannie Mae and Freddie Mac's preferred securities were trading higher, following news out late Monday regarding a shareholder lawsuit.

Freddie's 8.375% fixed-to-floating rate noncumulative perpetual preferreds (OTCBB: FMCKJ) gained a quarter, or 4.67%, ending at $5.60. Fannie's 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) rose 31 cents, or 6.03%, to $5.45.

Shareholders of Fannie and Freddie filed a lawsuit against the U.S. government on Monday, alleging that the 2008 takeover of the mortgage giants was illegal and at the cost of the shareholders' property rights. The suit claims that the government bullied and coerced the firms' board of directors in order to ensure that the companies would continue to provide mortgage guarantees, but on the government's terms.

"The companies' willingness to continue providing liquidity to the mortgage markets on a large scale was crucial to the recovery of the devastated home market and the broader economy," the plaintiffs' lawyers said in court documents. "The government took control of the companies to make sure this happened on its terms, completely ignoring the loss of rights and economic value it caused to the shareholders."

Furthermore, the shareholders believe that the 2008 takeover that resulted in government conservatorship was unwarranted, as neither agency's financial status met the 12 requirements for takeover as laid out by the Housing and Economic Recovery Act of 2008.

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